Syndicated loan

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A syndicated loan (or "syndicated bank facility") is a large loan in which a group of
banks work together to provide funds for a borrower. There is usually one lead bank (the
"Arranger" or "Agent") that takes a percentage of the loan and syndicates the rest to other
banks. A syndicated loan is the opposite of a bilateral loan, which only involves one
borrower and one lender (often a bank or financial institution.)

[edit] Reasons for syndicated lending

Like insurance, a loan is an assumption of risk. For a certain class of loan, with certain
rules, the bank might believe that it is likely that 5% of all borrowers may go bankrupt. If
the banks cost of funds is a hypothetical 5%, it needs to charge more than 10% interest on
the loan to make a profit. In general, banks and the financial markets use risk-based
pricing, charging an interest rate depending on the risk of the loan product in general or
the risk of the specific borrower. The problem with larger businesses loans however, is
that there is less of them. So if the bank only has one large business loan, if that business
happens to be one of the 5% that defaults, then the bank loses all its money. For this
reason, it is in the best interest of all banks to split, or "syndicate" their large loans with
each other, so each get a representative sample in their loan portfolios.

A second, often criticized reason for syndicating loans is that it avoids large or surprising
losses and instead usually provides small and more predictable losses. Smaller and more
predictable losses are favored by many management teams because of the general
perception that companies with "smoother", or more steady earnings are awarded a higher
stock price relative to their earnings (benefiting management who is often paid primarily
by stock). Critics such as Warren Buffett, however, say that many times this practice is
irrational. If the bank could still get a representative sample by not syndicating, and if
syndication would reduce their profit margins, then over the long term a bank should
make more money by not syndicating. This same dynamic plays out in the investment
banking and insurance fields, where syndication also takes place.

To avoid that the borrower has to deal with all syndicate banks individually, one of the
syndicate banks usually acts as an Agent for all syndicate members and acts as the focal
point between them and the borrower.
[edit] Largest Syndicated lenders in the United States in
2006
Name and market share:

• JP Morgan 28.9%
• Banc of America Securities LLC 21.4%
• Citigroup 14.7%
• Wachovia Corp 5.6%
• Wells Fargo 4.8%
• Deutsche Bank AG 3.4%
• Royal Bank of Scotland Group 2.1%
• Goldman Sachs & Co 2.0%
• Merrill Lynch & Co Inc 1.9%
• Barclays Capital 1.8%
• Credit Suisse 1.8%